The Adventures of Charlie Champion

Every day I watch the steady increase in stock prices and I hold my breath.

” Will today be the day the world wakes up , looks in horror at their portfolio holdings, and decides to Sell ! Sell ! SELL !!!”

Stocks are going to be hit hard and the Market is going to tank, when people realze that the recovery is a fraud.

There are several things which might set this off, but I believe that the second wave of foreclosures and defaults is getting ready to begin in early 2010.

Rising unemployment is definitely a major factor, pushing many prime mortgage holders over the edge into default.

The depletion of the severance packages given to bankers and other executives in the fall of 2008 and early 2009 is beginning to take a toll. Upper income executives expecting to quickly find new jobs, continued to maintain a semblance of their life style, and with the scarcity of jobs, they find severance pay dissapearing, and bank accounts depleted.

This financial deterioration and continued bleak employment picture is now affecting a new category of exotic mortgages, which were developed in the early part of this decade to enable young executives to take advantage of the exploding real estate market.

Beginning in 2002 and 2003 , just as the real estate market  began to approach its peak, the Alt A, and oprtion ARM’s sprang into existence as a way for these wealths executives to purchase homes that they could not really afford, by offering loans with 5-7 year interest only payments, or low interest mortgages with an adjustable balloon after the 5-7 year period.

Additional creative, no income verification loans were created , featuring low payments for that 5-7 year period, knowing that all of these prime mortgages would adjust upwards after the initial period.

The theory was dependent upon a never ending rise in real estate prices and a endless supply of money available to fund new mortgages.

These adjustable mortgages . by contract with the buyers, are set to adjust not at prime or treasury rates, but at a premium spread above these rates.This is the payment agreed to in exchange for no income verification and low payment options selected by home purchasers.

These higher peyments are confounded by the reality that many of these larger mortgages are already under water.( Loan is more than the value of the home)

The timing of many of these loans during the last phase of the Real  Estate Boom, leaves many with a very high loan to value ratio.

As these loans readjust then end up in defauld , the foreclose rate will accelerate, creating a new real estate tumble.

TOMORROW

WHY IS THE STOCK MARKET DEFYING REALITY

The current 7 month rally on Wall Street is unusual for a number of reasons, first and foremost being the lack of statistical relevance.

The underlying fundementals for  publicly traded companies generally provides a reality check that engenders a modicum of sanity to a roaring bull market.

Earnings and the P/E ratio(Price easnings ratio) historically give a focal point for evaluating a reasonable trading range for a companies stock.

This is not currently the case. Most companies have improved their balance sheets by reducing overhead, shedding employees, and reducing inventory.

These factors are admirable ,as corporate America attempts to weather the perfect storm of a heavy recession, an ultra left wing economic policy, real unemployment over 17%, and an arguably ineffective policy of squandered stimulus and corporate bail outs.

“Then why”, you might ask ,” is the market still going strong?”

This rally has no legs to keep it running.

Observations and interaction with the public has made me suspect that the retail public has not been the fuel for this rally.

This suspicion was recently confirmed by a report released by TrimTabs.

In the last 6 months only $ 2.5 billion has been placed into equity mutual funds, while almost 12 times that amount has gone into bond funds, an indication of conservative saving not speculative risks.

The U S investor has watched this rally rather being the fuel for its excess.

Who’s  behind the speculative excess which has seen this unworthy market gain over 50% from its march lows, defying all underlying realities.

The answer has to be hedge funds. institutional speculators, the investment bankers with their TARP money and access to treasury funding as newly accredited banks.

These Go Go managers have a different perspective on the rally.

If indeed the rally turns out to be real, and they miss it, their jobs and reputations are toast.

If the rally fizzles and fails, they are risking someone else’s money.

The risk reward is in favor of maintaining the speculative push.

The danger in this type of speculation is  extreme.

As they jumped into the rise, they will be willing to bail at the first sign of a negative reality.

We saw a free fall market last Fall.

Let unemployment continue to increase.

Let the next round of Prime Adjustable Rate mortgages begin to default.

Let the commercial real estate market crash due to the flood of small and medium sized companies being forced to close.

Let the perfect storm flood the boat.

You have heard the phrase , sink like a rock.

Let the little investor BEWARE.

On Thursday I brought my puppy to work.

I am CEO of a company that imports slate, quartzite sandstone and limestone in tiles and slabs.

We would supply our dealers, and specified corporate projects throughout the United States. At least we used to be active distributors, but the recession/depression has seen our sales shrink by over 60% as the economy slides deeper and deeper into economic stagnation.

Our 10000 sf offices and distribution wareouse  is located in an industrial complex in Western Nassau County, Long Island.There are approximately 15 square blocks of what used to be an eclectic assortment of commercial  industrial businesses that called the area home .

On street parking was always scare, and the roar of large delivery trucks and interstate haulers caused  the buildings to vibrate.

That is all past tense.

There is plenty of on street parking.

The roar and vibrations of large haulers is no longer background noise.

Perhaps the most discouraging sight comes at the end of my day, when i take my puppy for a walk through the industrial park.

Everywhere there are signs of abandonment and stagnation.

Building available.

Property for rent.

Available sale or lease.

Available, will sub divide.

PLEASE BUY OR RENT MYCOMMERCIAL BUILDING. I CAN’T FIND ANY NEW TENANTS, AND THE OLD TENANTS CAN’T PAY THE RENT, OR THEY ARE OUT OF BUSINESS.

The signs of neglect are everywhere.

The lawns are shaggy.

The bushes are growing somewhat wild.

Pot holes remain for months.

The aftermath of a storm remains for weeks.

Where in the past the plants worked multiple shifts, with management staying till 6:30 or 7:00, now the streets are empty by 5:05.

I see this as a  microcosm of American small business.

The banks that hold commercial mortgages on these warehouses and small manufacturing businesses have to be in real jeopardy of  defaults and foreclosures .

The roar of the underwater commercial loans is beginning to glub!glub! GLUB!